Retail Prices Index hits lowest level for 60 years

Jul 15 2009 by Iain Laing, The Journal

INFLATION fell below the Bank of England’s 2% target for the first time in almost two years in June, according to new figures.

The Consumer Prices Index (CPI) slid from 2.2% to 1.8% in June, the Office for National Statistics (ONS) said – the lowest since September 2007.

Falling food prices in June – particularly for meat, milk and fruit – were the main factor behind the fall, compared with a year earlier when food costs were rising sharply. CPI was also dragged down by a lower increase in furniture prices than seen last year.

Economists said inflation below the Bank’s target gave rate-setters plenty of breathing space to keep the cost of borrowing at 0.5% for several months to come, as well as eventually increasing the £125bn programme to boost the money supply.

Average petrol costs in June also rose 4.4p to 101.6p a litre and mortgage arrangement fees fell this year compared with rises a year ago and insurance costs also fell more quickly than 12 months earlier, despite an upward effect from dearer computer games. Inflation-watchers on the Bank of England’s Monetary Policy Committee will be relieved that CPI is now below target after an 18-month period in which rocketing energy bills, food costs and petrol prices pushed the benchmark to a record 5.2% last September.

But according to its own predictions, CPI is likely to fall below 1% later this year as the impact of recession weakens demand and prices.

This means Bank Governor Mervyn King is likely to have to write a first letter to the Chancellor to explain why CPI is undershooting the 2% target.

The figures also showed the wider Retail Prices Index, which includes housing costs such as mortgage interest payments and council tax, falling to minus 1.6%. This is the lowest level since ONS records began in 1948.

RPI was affected by the same factors which has dragged the CPI lower in June, but is negative due to lower mortgage interest payments than a year ago. Interest rates are at a record low of 0.5%, compared with 5% a year earlier.